Elements of SWOT analysis

This article is about SWOT analysis, which has to do with the analysis or evaluation of the strengths, weaknesses; opportunities and threats (SWOT) to an organisation. The strengths and weaknesses deal with the internal circumstances of an organisation while the opportunities and the threats deal with the external environment of the organisation. Strategies need to be formulated to handle the respective outcomes of the SWOT analysis. Strategy identification is essential in tackling future events. To succeed, SWOT analysis must be done with sincerity and honesty. SWOT analysis, however, does not have the in-built mechanism to handle future uncertainties.

Definition and Meaning of SWOT

This is the analysis and evaluation of strengths, weaknesses, opportunities and threats (SWOT). This concept of SWOT can be used to classify and explain any situation. Strengths and weaknesses fall under the internal environment of an organisation and therefore can describe the internal circumstances of such an organisation. On the other hand, opportunities and threats adequately express the circumstances of the external environment.

SWOT analysis is often presented in matrix form although it is used to explain a complex practical reality. When the two factors internal and external become more vivid, clear strategic analysis as described by Weihrich (1982) is adopted.

  SWOT Matrix Model

Internal factor	Opportunities	Strengths	Opportunities	Weaknesses
External Factor	Threats	Strengths	Threats	Weaknesses

Table 1           SWOT Matrix Model

 

You may have to go through the following process to be able to fill out matrix.

1.    Prepare an enterprise profile showing the kind of business, the geographic domain, the competitive situation and top management orientation.

2.  Identify and evaluate the economic, social, political, demographic, products and technology, market and competitive factors.

3.  Prepare a forecast; make predictions and assessments of the future

4. Prepare a strength and weaknesses audit in the management and organisation's operations, finance, marketing and other key areas.

5.  Develop alternatives.

6.   Make strategic choices by considering strategic tactics and action.

7. Prepare contingency plans.

A careful observation of SWOT analysis indicates that it defines the relationship between the internal and external appraisal in strategic analysis. It concerns the identification and analysis of the environment. When SWOT analysis is properly carried out, and the basic internal strengths and weaknesses of the organisation are well analysed and identified, the organisation should be able to know the appropriate strategy or strategies to adopt.     Every organisation should be able to apply the SWOT analysis to its competitors, suppliers, customers and even to itself. When this is done, the organisation will be able to realise its own position within the industry.

 Opportunities and Threats in Business Environment

The external forecast can be used to identify opportunities and threats in the business environment. These are illustrated as follows:

  Opportunities

These include high growth rate in the served market, government legislation which increases the need for the organisation's product, new raw material which can enhance product quality and weak competitor in a served market.

  Threats

These include new technologies that obsolete the company's products, industry overcapacity which increases price competition, legislation causing major operating changes and aggressive price competition in a served market.

Strengths and Weaknesses in Business Environment

Just as in opportunities and threats, external forecast can be used to identify strengths and weaknesses in the environment. The analysis of strengths and weaknesses relative to competition require honest assessment. The task involved is analysis of position in the industry, determination of the successes factors in the industry, identification of strengths and weaknesses and assessment of competitive position. At the end of these, such questions like, where are we? Where have we been? Where are we going? would have been answered.

To be able to adequately identify strengths and weaknesses we need to concentrate on the past and the present. Theses strengths and weaknesses may include:

Strengths

These include leadership in innovative product design, exceptional employer and employee communication, understanding and relationship. They also cover highest level of automated production in the industry, highly motivated field sales force and superior product quality.

 Weaknesses

The weaknesses include antiquated manufacturing and office facilities, out-of-date information systems, cash flow difficulties, limited supply of some raw materials and limited management in-dept.

A major weakness in an environment may be a very strong competitor which will obviously necessitate competitor's analysis. An analysis of key competitors will provide answers to these questions: Who are they? What are their resources? Who are their customers? Why are they so successful?

We should seek to know how competitors will react to our strategies. For instance, how will they react to market changes? Where are they most vulnerable? Where are they strongest? Where is the most appropriate battleground to fight them and how?

We should also know if our weakness arises from our product lines, particularly with respect to performance trends in selling prices, labour costs and gross profit.

A company's weaknesses may also be as a result of the weaknesses in its functional areas such as marketing, engineering design and production, manufacturing, financing and human resources. Different strategies will be required for the different observed and identified weaknesses.

Strategies Indicated by SWOT Analysis

The thrust of these is that there must be a separate strategy to take care of each market segment. The Boston Consulting Group (BCG) matrix categorises businesses as stars, cash cows, question marks and dogs. There are separate strategies for each strategic business unit (SBU).

The various strategies that are suggested by a good SWOT analysis are hereby presented. The strategies are called by various names by different authors.

Maxi-Maxi

This is a situation in which the organisation is playing from a position of strength to an opportunity. So the business objectives are meant to overcome external threats in order to focus on this segment.                It is referred to as exploit by Rowe et al (1994).

Mini-Maxi

The appropriate strategy for this segment is the one that minimises weaknesses and maximises the opportunities.  Such an opportunity exists but requires strength where the organisation currently experiences a weakness. Therefore, a strategic action is needed to remove the weaknesses and prevent the opportunity from going to the competitors. Rowe et al (1994) call this segment SEARCH.

 Mini-Mini

The strategy for this segment should be such that the threat and weakness will be reduced. The situation is precarious. So the organisation should adopt a strategy that can avoid this kind of situation. It is termed AVOID by Rowe et al (1994).

Maxi-Mini

An appropriate strategy for this particular business condition is the one that uses the strength of the organisation in order to defend or avoid the threat. However,  caution must be exercised in order to avoid unnecessary and costly competitive battles.

Strategic options that circumvent the threat should first be considered and preferred. Rowe et al. (1994) refer to this strategic segment as CONFRONT.

Identification of a strategy is essentially about tackling the future. This must be based on a realistic and factual evaluation or appraisal of an organisation" s past and present performance. Identification of opportunities and threats alone are not enough bases for developing strategies. To do this the organisation's strategy must consider organisation"s resources and competitiveness. 

The strategy could only source energy from the results of the combined assessment of the market attractiveness and business strength. So, it is very crucial to conduct resource analysis and capabilities. The main aim of such an exercise is to use the strategy pointers to assist in using existing business strengths to exploit the opportunity. It is possible to use it to create new opportunities to counteract the threats and repair the weaknesses. 

For strengths to be useful this way, they must be carefully, realistically and critically identified, evaluated or assessed. If the organisation uses the same techniques to assess competitors, the organisation can then capitalize on the weaknesses of the competitors and avoid going ahead against their strength.

SWOT analysis, especially when it forms part of environmental analysis, is referred to as the TOWS matrix. However, Rowe et al. (1994) refer to it as WOTS-UP analysis and offer some suggestions on each of the matrix segment. Whichever way we may look at it, SWOT analysis is a systematic method of matching environmental threats and opportunities with the organisation's strengths and weaknesses.

One critical aspect of SWOT analysis is the tendency to cover up feared weaknesses resulting in a less than honest appraisal of SWOT. In such a situation, perceived strengths can be proclaimed rather than the weaknesses observed. This less than honest SWOT analysis can be used to generate strategic options and forms part of the strategic choice element.

 Limitations of SWOT Analysis

Although SWOT is future oriented, it does not have any in-built mechanism for handling the uncertainly of the future, nor does it give any holistic model of the organisation. SWOT analysis does not aim at option evaluation or selection.  However, in the process of going through the internal and external analyses and appraisal, certain objectives and certain performance measures may be reviewed.